High Uncertainty Makes This Completely Certain: High Gold Prices

Emma Wall: Hello, and welcome to the Morningstar series, “Why Should I Invest With You?” I’m Emma Wall and I’m joined today by BlackRock’s Evy Hambro, Manager of the Gold and General Fund.

Hello, Evy.

Evy Hambro: Hi, Emma. How are you?

Wall: I’m very well. Thank you. Looking at your three-year figures, very positive, up 12% on an annualised basis. But it’s been a bumpy ride, hasn’t it? Last year, in particular, had some very interesting figures when you compare it to the benchmark and that is because your quality bias. What was that disparity?

Hambro: Yeah. Well, last year was an extraordinary year. We always had so many different moving parts with culminating really in the peak of the gold market in 2016 around the Brexit timeframe when gold prices had a massive spike. So, a lot of the junior stocks in the sector with kind of lower-quality assets, more marginal, when we had that move higher in the price, their share prices took off.

And our fund has never really had that much exposure to some of those companies and that left us behind a bit. But I guess it’s a little bit like kind of the tortoise and hare. Over time, we caught up and if you look at the numbers now, I think, those days are a bit of memory. So, we’re pretty comfortable with our strategy that’s worked well for 25 years now.

Wall: Obviously, gold is in the name and you are reliant in a lot of ways on the gold prices. But how correlated is it? Is it an exact correlation? Are you beholden to that gold price?

Hambro: Yeah, that’s a really good question because that data changes a lot. So, there are periods of time in the history of the fund where gold prices have been going up and gold shares as a group and obviously, that’s what we invest in, have actually been going down. So, if you look at the periods, kind of 2012 was a good example, 2011, when the gold prices were rising very rapidly and heading up towards those peaks.

Gold shares were being left behind. And actually, in some of those years they actually fell. The reason for that is that the management of the gold mining companies at that time were focusing their businesses on growth and making some fairly value-destructive investment decisions and gold equities were being de-rated. So, they were losing their multiple. So, their businesses were performing, the profits were rising, but because the multiples were contracting, the share prices weren’t actually going up. Those are anomalous.

Normally, we tend to move in the same direction as the gold prices and at a multiple of it. So, the historical number is about 1 to 3. So, for a 1% change in the price of gold up or down, the shares normally go up about 3% or go down by 3%.

Wall: And gold prices tend to fare well when there is a lot of uncertainty around. I think the current political climate certainly speaks to that. You have Donald Trump in the White House who is unpredictable if not exciting. You’ve got European elections this year. How much do you take into consideration those macro factors, not least the Middle East and Korea, when you are making investment decisions?

Hambro: Yeah. So, we tend to think primarily about the companies because we think we can add value by spotting opportunities that sit inside companies that might not necessarily being recognised by the market. And if we can get those bits right, if gold prices go up or down, those individual events that we’re targeting should release value. If they release value when gold prices are going up, they will make that company significantly outperform in a rising market and in a falling market, it should stop those companies from falling as much as the sector. So, it’s that that’s our main focus.

I would agree with you though that gold is a safe haven asset and in times of trouble it does tend to deliver the kind of insurance qualities that people look to it for. In today’s environment where you have got a lot of uncertainty, and you’ve mentioned a number of the factors, we have seen a significant increase in investors coming to us and on the basis that they want to take a little bit money off the table – you’ve got the DOW and then NASDAQ and equity markets as a whole at all-time highs, people have made a lot of money by having exposure. So, to take a little bit of money off the table and put it into something that will protect you seems to make sense. And a lot of clients are choosing gold as a diversification tool and thankfully, they are choosing our fund as one of the things to use.

Wall: As a fund manager in any sector I imagine that you want the stocks that you hold in times when they don’t do so well, to take a step back and look at the way that they can cut costs… so they can take that difficult medicine in order to, when times rally again, they absolutely appreciate from that upside. Has that been done in the mining sector? Have they made the changes that were necessary?

Hambro: Yes. Well, the mining sector has been through a horrendous time for the sector as whole as much as gold equities. So, we’ve had the kind of Chinese-related boom in the last decade and that kind of peaked after the injection of capital in 2009 with share prices getting to the highs in 2011. And so, the unwinding of some of the mistakes as the kind of capital tide went out and left people with their mistake fully exposed, that’s taken a long time to resolve, whether it’s cost inflation that was baked into the businesses, inefficiencies, lack of productivity, poor investment decisions either by building things inappropriately in terms of the cost or buying stuff at too higher prices.

We’ve been through now five years of kind of sorting that out and now the businesses have re-based themselves a little bit like kind of Ctrl+Alt+Delete on a computer. And we’ve got businesses today that are in much, much better shape than they have been for a long and actually, in fact, that process probably came to an end at the beginning of last year.